FSR Magazine

Being A Franchisee

After nearly a quarter century as a successful casual-restaurant franchisee, Mike Scanlon still finds the business exciting.

And challenging.

“There are a lot of casual restaurants out here, and each one is trying to be relevant and stand out in the crowd,” says Scanlon, 57, president and chief executive of Thomas & King, one of Applebee’s biggest franchise operators. “It does make every day interesting.”

Thomas & King, based in Lexington, Kentucky, is the nation’s 22nd-biggest restaurant franchisee–second among casual-unit owners–with 2010 annual sales of $225 million, according to statistics from Technomic, Inc.

Revenue comes from 89 Applebee’s and six Carino’s Italian units encompassing seven markets in Kentucky, Ohio, Indiana, Arizona, and Pennsylvania. The company has about 5,760 employees.

It’s no surprise that a big franchise owner like Thomas & King operates Applebee’s restaurants. After all, Applebee’s is by far the biggest casual restaurant chain with more than 2,000 eateries worldwide.

The casual-dining segment is fairly mature, with most of its big players having been around for decades. The sector is generally thought to have started with T.G.I. Friday’s, the singles-friendly New York City bar that spread nationally during the ’70s.

Restaurants now battling it out in the casual space are being pressured by a variety of forces that played out during the Great Recession of the late 2000s, including cautious guests and a wildly competitive environment.

“Casual dining is being squeezed pretty heavily by the whole fast-casual explosion,” explains Danny Bendas, managing partner with Synergy Consulting Group, a Costa Mesa, California, consulting firm. “Fast casual is where a lot of the growth is right now.”

At the same time, casual competitors “have come out with significant price offers, so pricing pressure continues to be a challenge” notes Darren Tristano, executive vice president at Chicago-based Technomic, a consulting and market research firm.

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On the positive side, casuals are showing signs of rebounding with “some positive sales growth,” Tristano adds. “Customers are becoming more comfortable.”

Applebee’s began in 1980 in Georgia. Franchising started in the mid-’80s.

Scanlon became connected with Applebee’s early. He worked in restaurants and real estate in Indiana, and, after moving to South Carolina in the early ’80s, began handling site selection and property for Tom DuPree, a Georgia Burger King multi-unit owner.

In 1985, in part at Scanlon’s urging, DuPree became an early franchisee of the newly named Applebee’s Neighborhood Grill & Bar. His first unit opened in Greenville, South Carolina, the following year.

The results were immediate and impressive.

“I thought of it as the new McDonald’s,” Scanlon says. “I saw what it could become and thought it would spread across the country. You could eat there every day and have something different. It had broad appeal for different age groups and different dayparts.”

In early 1988, he and Tom Root, then Applebee’s district manager in Atlanta, decided to develop their own units. Root became the operations manager and Scanlon joined with two South Carolina developers to form Thomas & King.

The company’s name stands for–nothing. Thomas was the first name of Scanlon’s father, and King “just sounded good,” Scanlon says.

The franchisee’s first Applebee’s opened in 1988 in Lexington, with the initial Ohio and Arizona restaurants opening the next two years.

“We did not really have a clue what it would become,” says Scanlon, who is the company’s CEO. What it became was Applebee’s International Franchisee of the year in 1998, and, by the early 2000s, the chain’s largest franchisee, with 85 restaurants in seven states.

Since then, a couple of operators have passed Thomas & King, which sold 11 units, including all of its restaurants in Illinois and Missouri. T&K has since added new stores.

Scanlon believes the business will continue to consolidate and that Applebee’s eventually will have several big operators like San Francisco-based Apple American Group, which owns 337 Applebee’s restaurants in 17 states.

“We have the infrastructure and efficiencies to do that, too,” he says. “I see a wave of acquisitions out there, and we’d like to be a part of that.”

Thomas & King added Carino’s in 2004. Scanlon was drawn to the concept “because the food was great and the numbers worked.”

While Carino’s has plenty of room to grow, the concept has been going through a reinvention. As a result, Scanlon is holding back on further expansion “until I understand more of what the franchisor’s intentions are.”

Ryan Bearden, director of marketing for Austin, Texas-based Carino’s, says the company has been attempting to “crystallize the focus on our brand” as it moves away from discounting to its culinary strengths of great recipes and menu items.

Caution is part of the fallout from the recent recession, which will influence the restaurant industry for years to come, according to restaurant business experts.

“So much changed during the recession, and remnants of that will remain for a while,” Bendas says.

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Many casual chains had offered steep discounts to get guests through the door “and now they’re having a difficult time convincing customers to pay full price again,” says Mallorie Rodak, insights manager for Dallas advertising firm The Loomis Agency.

“People’s value perceptions have been altered as a result of the steep discounts,” she says.

Eventually, that attitude will thaw, some experts say.

“We’re seeing a lot of pent-up demand by people who traded down to [quick-service restaurants] during the recession and are gradually feeling more confident” as the economy improves, says Brad Swanson, a managing director at Keybanc Capital Markets.

“They’re looking to make dining more of a social occasion than something at quick-service or fast-casual, which has a different dynamic,” adds Swanson, who leads restaurant and food service investment banking for the Cleveland-based company.

Rodak said an increasing number of casual restaurants are boosting business by expanding their dayparts, focusing on later hours to draw in young people who stay up and by adding a happy hour, complete with specials.

Franchise operations have particular advantages going forward.

“It’s tough that the you have the royalty expense that cuts into your margin, but you have the strength of a chain that is doing marketing and menu innovation and consolidated purchasing,” Tristano says.

Thomas & King was forced to make changes in the wake of the recession.

“We saw sales slide about 13 percent” during the downturn, Scanlon says. “We were staffed to grow four, five, six restaurants a year and remodel half a dozen a year, and suddenly we turned into a company that was negative in sales, all within six months.”

Every phase of the business needed to be re-evaluated.

“In the days of growth, we were not overleveraged,” he adds. “In the days of retraction and recession, we were suddenly highly overleveraged, and that got uncomfortable.”

The company reduced its real estate holdings from two-thirds of its restaurants to about 25 percent, thanks to sale-leaseback transactions. That helped T&K reduce costs and “killed $80 million in debt.”

More painful was having to lay off staff to cut costs.

“It was terrible,” says Scanlon. “I laid off 17 in one day. It was a nightmare. We lost good people, and you hurt for those folks. Those of us who had jobs were so glad to still have them, but you saw families suffering, vendors suffering. They were pretty dark days.”

Thomas & King now maintains a strong cash flow as it reinvents itself through innovations and efficiencies.

The company has increasingly relied on improved technology to cut costs and improve operations in everything from order flow to back-office work. A person was hired to handle social media and related tech issues companywide, one of a handful of new hires during the recovery.

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Another money-saving step was to cut dividends to shareholders in the closely held company. Soon afterward, one of T&K’s three founders, Ronald T. Reynolds, filed suit, alleging a variety of faults in Scanlon’s leadership.

“Dividends were a major part of our incomes,” Scanlon says. “But you can’t pay dividends and look employees in the eye when you’re losing money.”

Reynolds had not been an active participant in the business for some time, Scanlon says, unlike the third partner, Douglas Wilson, senior executive vice president of development. The three owned 90 percent of T&K’s shares.

According to reports, court documents said Scanlon and Wilson each lent Thomas & King $1 million in 2008 as working capital, while Reynolds declined to do so.

Reynolds asked to have the company placed in receivership, but the court denied that. The matter eventually was settled, and the company bought Reynolds’ stock. A few days after the shares were purchased, Reynolds died at age 78.

Other T&K execs own the remaining 10 percent of the company. They are allowed to cash out when they leave, like Root did several years ago.

As the economy recovered, so have the company’s fortunes. Average store sales have inched upward in the past two years and are now about $2.4 million annually.

T&K continues to operate with an overall philosophy known as Wow.

“Wow is the word that comes out of your mouth any time anyone does something that exceeds your expectations,” Scanlon says. “You want that wow, that energy, in the whole enterprise. If managers wow servers and servers wow guests, the whole energy is there.”

Owners should also consider the welfare of their staff and customers while making a responsible profit, he adds.

“It doesn’t take a genius to know what the right thing to do is,” says Scanlon, who made his restaurants smoke-free as early as 2004 because of concerns over the effect of secondhand smoke. “It’s also necessary to make money. We want the right balance.”

Thomas & King, based in Lexington, KY has 89 Applebee's units in five states.

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Thomas & King has been involved in a variety of charities and is working to create minority business opportunities. Scanlon, who served a term as vice mayor of Lexington, is an investor in National Diversity Solutions, a minority business enterprise in the city.

“I grew up in the middle of the middle class, and I had advantages because of race and gender,” he says. Others “deserve that chance.”

These days, however, Scanlon is focused on building restaurant sales. To help, Thomas & King launched a marketing campaign apart from Applebee’s national one.

The local campaign is a lunch promotion dubbed the 14-Minute Guarantee that promises meals ordered from a special menu will be served within 14 minutes or they’re free.

“Previously we did unlimited soups and salads, but over time our competitors did the same thing,” said Christy Hiler, chief strategy officer for Cornett Integrated Marketing Solutions, T&K’s ad agency based in Lexington. “We needed a new message.”

The impetus for the campaign is the tight time frame people have for lunch that led many of them to choose quick-serves and fast-casuals for that daypart. But new technology now allows casual restaurants to serve items faster.

The lunch guarantee became possible, Hiler said, because “operationally we knew [T&K] could deliver. But it was going to be challenging for them, so there is kind of a game element to it: Can I get a free meal or can you serve me during the time promised?”

Thomas & King has given away “more than a few” meals, but the company has seen a 10 percent boost at lunch. Although servers don't get a tip if the meal's free, Scanlon said most servers "love" the lunch offer due to its game element, plus they can make better tips if there's more business.

Commercials promoting the offer feature a catchy jingle and video combining “Glee” with “The Office.” And to expand the relationship with customers, Cornett developed a concept to keep guests engaged while they are waiting to eat.

During a restaurant visit, the ad team noticed the obvious: A lot of customers spent time looking at their smart phones. So the team developed a digital component, using a Quick Response (QR) code on a table tent to make a poster-card cat “talk.”

Profile

Thomas & King

President & Chief Executive Officer

Mike Scanlon

Owners

Scanlon, Douglas Wilson, other company executives

Year founded

1988

Annual Revenues

$225 million-$250 million

Restaurants

89 Applebee’s

6 Carino’s Italian

Restaurant locations

Kentucky, Ohio, Arizona, Indiana, Pennsylvania

A cat was chosen because videos of cats are YouTube favorites. The message is delivered by holding a smart phone up to the QR code on the card under a picture of the top half of a cat’s head. That reveals a talking cat mouth with humorous patter.

Hiler says the next phase of the campaign will add a dog to the mix.

Looking into the future, Scanlon says the company is holding off on additional development until he can get a better handle on what the future–both economically and in terms of the direction of Applebee’s and Carino’s.

“I want to work my way through this consolidation period and find out where everyone ends up, including us,” he says.

Scanlon may even consider adding another franchise, but not now. “The craziest thing would be to get a third concept and block myself from adding more Applebee’s,” he says.